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A 2018 mortgage market forecast

The housing market has improved every year for nearly a decade. Now, economists predict continued expansion which likely will create mortgage opportunities for financial institutions during 2018.

Rates and employment are key indicators economists use to get the pulse of the housing market.

Rates both affect home affordability and can signal recession. Employment data can predict how many consumers could possibly be homebuyers; it also can signal recession. Currently, both rates and employment data point to continued health for the U.S. economy and, thereby, for the housing market and home finance, according to economists in Freddie Mac’s Economic & Housing Research Group (EHRG).

The Federal Open Market Committee (FOMC) raised its policy target rate three times in 2017. While the yield curve flattened significantly in response to the FOMC’s changes, short-term and long-term rates did not invert, which would have indicated increased risk of recession. (An inverted yield curve has preceded every single recession in the past 50 years.)

EHRG economists expect the FOMC will again raise rates three to four times in 2018. They do not expect the yield curve invert as a result. “Gradual interest rate increases will maintain housing market momentum,” they said. “Home sales, housing construction, and house prices will all be modestly higher in 2018 relative to 2017.”

Mixed messages from employment data

The employment picture is similarly positive, though it also has a caveat. The rate of unemployment in December 2017 was 4.1 percent. The unemployment rate, however, is well below its “natural rate.” The “lack of wage inflation and the slow recovery of the employment-to-population ratio indicate that there is potentially some slack left in the labor market,” EHRG economists said. “However, history has shown that when the unemployment rate falls below the natural rate for an extended period, a recession typically follows in two to three years.”

Mixed signals aside, “home sales, housing construction, and house prices will all be modestly higher in 2018 relative to 2017,” EHRG economists said.

Continued home affordability

In the context of rising rates, one challenge facing the housing market is rising home prices. Home prices will increase nearly 7 percent during 2018. Unfortunately for homebuyers, economic growth will likely not be strong enough to generate income gains that keep pace with house prices, EHRG economists said.

While elevated rates and home prices do spell higher housing expenses, affordability will remain quite high, EHRG economists said. “The median income family has more than enough to qualify for a conventional mortgage on the median-priced home,” they said.

Millennial buyers make an entrance

When combined with the positive projections from EHRG economists, trends for Millennial homeownership bode well for mortgage lenders. Contrary to claims that “Millennial homeownership demand continues to slumber,” analysis shows that Millennials are buying homes at faster pace with each passing year. “Increases in the rate of homeownership between 2014 and 2016 were significantly greater – by two to four times – than the gains registered [by Millennials] from either 2008-2010 or 2010-2012,” according to an article published by Fannie Mae.

Fannie Mae’s analysis aligns with U.S. Census data. Homeownership for those under age 35 has grown more than 1.3 percent during the last 12 months. The increase “‘was by far the largest increase of any age group,’” Bloomberg recently reported.

As Fannie Mae economists wrote, “Millennial homeownership has upshifted substantially in response to improvements in the economy.” If that trend continues, not only will [Millennials] close the homeownership gap, they will drive demand upward in the single-family housing market in 2018 and the years to come.

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